Airlines and lessors have been enjoying cheap funding from an abundance of sources for the past few years, but this favourable environment is about to be tested, as financial events on both sides of Atlantic begin to creep into the aviation sector.
Possible disruptive effects following Greece's missed €1.6 billion ($1.8 billion) payment to the International Monetary Fund and the expiry of the US Export-Import Bank charter, both of which occurred at midnight on 30 June, could affect the availability and the cost of funding to the aviation community.
In Europe, the most obvious worry is about the future of region's single currency and its impact on borrowing and operations.
"Will it [the euro] depreciate? If so... this could impact European airline profitably as airlines could face lower revenues but their cost side will remain in US dollars," said Investec co-head of aviation finance Alok Wadhawan at the Ascend Finance Forum in London on 30 June.
However, Wadhawan maintains that the long-term impact of events unfolding in Greece will be largely benign.
He adds: "Greece accounts for below 2% of the eurozone GDP, so I believe the impact should be limited."
Richard Moody, head of aviation financial solutions, asset finance and leasing at Deutsche Bank, says he is watching for changes in funding costs.
"Will this set a new benchmark in pricing risk? Are we in a different risk paradigm? These are themes that will continue over the next weeks, and months, as we see what happens," he says.
While the market reaction to the crisis has been fairly calm, a lessor bond financing was postponed and possibly scrapped as a consequence of investor nervousness ahead of the IMF payment deadline, say sources. The good news is that no further aviation financings have been impacted, banking sources indicate.
Surprisingly, the expiry of the US Ex-Im Bank's authority to make new loans – amid opposition to its very existence from conservative Republicans in Congress and various US airlines, with Delta Air Lines being the most vocal – has raised few eyebrows in the aviation finance community.
No doubt this silence reflects the abundance of liquidity available from global financiers on the hunt for yield in an ultra-low interest rate environment as well as the expanding operating lease industry.
"Hardly anyone is worried, and that clearly tells you that times are maybe too good and, certainly, there is a lot of money around," says a financier. "I do wonder if people have completely forgotten about the possible fears of a funding gap after the 2008 financial crisis, when Ex-Im was the main shop in town. Without it, deals would not have been financed, and we would have been in serious trouble."
Since 2008, Ex-Im has provided about $8-10 billion per year in guarantees for Boeing aircraft. Appetite for Ex-Im funding has been scaled back, though, following the 2013 introduction of the Aircraft Sector Understanding accord, which has made export credit financing more expensive.
While few industry observers doubt that US Congress will reauthorise the bank's charter at some point, some speculate it will be restored with restrictions, notably pertaining to widebody financing.
Opponents of Ex-Im argue that strong airline credits, such as Emirates or LAN Airlines, should not receive financing support particularly on widebody purchases that are used to directly compete against US carriers on routes to the USA.
"Widebody funding is getting harder and harder to justify, and Boeing, Pratt and GE are taking this threat to financing very, very seriously. I think we could see signs of reform once Ex-Im reopens," says a lessor.
A European banker believes all export credit agency funding for aviation should be stopped, not only for competition reasons cited by various airlines, but due to the "enormous and growing" source of capital from the operating lease sector. That would mean also halting loan guarantees from Coface in France, Hermes in Germany, UK Export Financing, Export Development Canada and the Brazil's BNDES.
"We have an extremely successful and expanding leasing industry, so why should governments take on the risks of airlines in any case. Lessors are trained to deal with this asset class and they can access capital easily. It only makes sense to revisit export credit support, not only because various airlines want it scrapped, but in light of the growth of lessors."
Ex-Im will continue to service all existing and approved deals but will not accept any new applications.
Source: Cirium Dashboard
